Purchasing Power, Value And The Nominal Dollar Illusion 

The U.S. dollar isn’t what you think it is — and here’s the proof. 

By Frank A. Jurs II 

What is the value of a one hundred-dollar bill? 
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Some would be inclined to answer by describing money’s fungibility: five twenty-dollar bills, ten ten-dollar bills, one hundred one-dollar bills etc. Although correct, these answers are lacking context, and we are not left with any information that is particularly helpful in terms of money’s function as a medium of exchange or real value. 

This is like saying a foot is 12 inches long, and although also correct, without the use of a ruler or measuring tape, describing a foot as 12 inches gets you no closer to information that describes its actual length. 

A dollar bill, or any other fiat currency that is used as money, has basically two values at all times, the nominal value, like in the above answer, and the real value, which is a bit more elusive. Nominally, $100 was exactly the same in 1909 as it is in 2018, and will be in 2050. Only using it as a medium of exchange we discover its real value, also known as its “purchasing power. 

While this may seem obvious, you will see that we all suffer from the illusion of nominal value. 

The higher quantity of dollars that we earn, the more we invest them, the wealthier we may feel as compared to previous generations. But are you really any wealthier? Nominally, I am sure you are, but is your wealth real? 
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Through the constant fluctuations in currency exchange rates, and the ever-present monetary inflation, the dollar is continuously devalued and worth less and less every year. There are estimates that the dollar has lost 95%-98% of its purchasing power in a little over one century. 

In other words, the current dollar has the same real value of about 2-5 pennies did in 1913. 

So why do we all measure the perceived values of goods and services using dollars? Again, to measure the real value of something, you cannot use a metric which does not have a fixed value. This would be like a carpenter using a measuring tape that changed its length everyday to build your house. The lengths described on a measuring tape must stay fixed, that way you know what an inch, a foot, or 10 feet is every time you use it. 

Our “measuring tape,” the dollar, changes in value constantly, therefore trying to use its nominal value is misleading and useless as a description of real value. 

Think about it another way. Let’s say your grandfather earned $6,000 in 1955, and you’re going to earn $54,000 in 2018. At first blush you seem to be doing better off, having earned nine times his salary in the same 365-day period. Clearly you are earning more, but are you actually better off, or more wealthy, than he was? 

The answer, sadly, is probably not. Just using the official government’s Bureau of Labor Statistics data, which some say is not truly representative of actual inflation, you would need to earn about $58,000 per year to have around the same purchasing power as your grandfather’s $6,000. 

This is the nominal dollar illusion. It’s not really how many dollars you have, it’s what you can actually exchange them for. 

So back to our original $100 bill example. Nominally, you and your grandfather have the same amount of money, the only difference is that his 1955 $100 bill was able to purchase what would cost you $930 today, and his father’s 1918 $100 bill was able to purchase what would cost you over $1,700 today. So the question must be asked, what will that $100 bill in your wallet today be worth in 2054? 

Using the “rule of 72,” take 72 and divide it by the Federal Reserve’s target inflation rate of 2% (which is also probably grossly understated). You will get 36. This is roughly the time, in years, it will take to diminish the purchasing power of all the dollars you hold today by 50%. So, all things constant, in 2054 your $100 bill will purchase approximately what $50 does today. 
When attempting to measure value, instead of using the dollar as the “ruler,” why not substitute another form of money which has been used and has maintained its purchasing power for over 5,000 years, all over the world, as the measure? 

When you start to measure things in terms of gold, which is a much more stable metric, you begin to truly uncover the nominal dollar illusion.... 

The home I am sitting in as I write this article was purchased brand new in 1950 for approximately $8,500, and again purchased in 2012 for $310,000. The original owner would have made over 36 times his original investment in a little over 60 years. Ask most anyone and they will point to this example as proof that real estate always goes up in value — but what if I told you this was wrong? 

In 1950, an ounce of gold was valued at $40.25, and although it was not legal for private ownership, gold was still correlated to the dollar at a fixed rate. So in terms of gold ounces, the new home cost the original owner approximately 211 ounces of gold ($,8500/$40.25). Some 62 years later, in 2012, the home was sold for approximately 187 ounces of gold, as the price for an ounce of gold was approximately $1,655 ($310,000/$1,655). 

So when measuring goods and services in terms of gold, you can see that this home cost 24 ounces less than it did six decades earlier, despite the fact that it cost over $300,000, or 3,600%, more in dollars. 

This is the nominal dollar illusion. 

Throughout history, the median single-family home has consistently cost approximately 200 ounces of gold, with fluctuations near this figure. The exception of course is a speculative bubble. 

The same home I described above was also sold in 2005, during the height of the first American housing bubble, for $445,000. The gold price then was approximately $505 per ounce then, so the buyer paid around 880 ounces of gold, or four times the normal cost. While the housing bubble was evident to some observers even just using dollar terms, it was so obviously a bubble using the gold metric and history. 

This begs the question, are the prices of goods, services and assets rising, or are we just measuring the dollar’s decline in purchasing power through monetary inflation and time? A great resource, PricedInGold.com, catalogs amazing research and charts by Sir Charles Vollum that can help answer this question. This research prices all manner of things in gold grams, rather than dollars. 

The “bull run” in equity markets have certainly been in the news a lot as of late. Just in the beginning of this year the Dow Jones Industrial Average and S&P 500 were reaching all-time highs on more dates than one could count. So, in terms of dollars, equity values have never been higher. What happens when these indices are priced in gold? 

Another major expense for families is the ever-rising cost of food and groceries. Despite America being an agricultural powerhouse, it seems that over time food and groceries just keep getting more and more expensive. Contrary to the dollar expense, when you price the FAO Food Index in gold, you’ll discover that food has generally never been as inexpensive as it is today.

Reposted From the USNA Alumni Blog:

Posting by Major General Donald McGregor, USAF, Retired (University of MN 1981) 

Here's my take on Mattis resigning. First, he is a great American and one of the finest commanders the U.S. military has produced. I met him as brigadier general going through groom school. He was the CENTCOM commander at the time and full of piss and vinegar. We locked the doors and he gave our new class of one-star generals an excellent fire and brimstone speech about the middle east and our accomplishments...Motivating to say the least. I too was excited to see him as the SecDef. But also drew caution to his non-political view of the world and Trump's "America First" mantra.  

Former Generals should not write public policy. Trump fired Mattis (he didn't resign...you can bet he was told to get on board or else). Mattis is a product of the Cold War and Middle East conflicts. He is a career military person and we are seeing quite plainly why presidents should caution hiring generals into politically sensitive positions. It is foreign to them coming from an orderly (no pun) organization that believes in honor, selfless action and defending the nation...at all cost. To a general, politics is a weak man's sport and have little time for it. Unfortunately, it is real and much a part of the painful process in DC. You either get it and become the compromising person it requires or be exploited (LTG Flynn), unfit (LTG McMasters) or be frustrated (General Kelly and Mattis). In short, the reason Mattis believes in maintaining our positions in Syria, Afghanistan or our security alliances (NATO, etc.) is that he grew up in an environment based on non-strategic threats used to justify large military force structures (size)..non-strategic threat meaning not a threat to our survival.  

I personally was a part of DoD's strategic planning process to identify U.S threats and subsequently justify the forces it needed to defeat or deny these threats. Much of our current security philosophy started after WII when the U.S. decided to create a Cold War out of ideological differences with the Soviet Union. Probably somewhat justified since communism's expansive nature was a legitimate threat. But after the wall fell, the Pentagon or military complex was in a pickle since the justification for forces was in jeopardy...i.e. we lost our main strategic threat and no longer needed the large forces it required? However, along came the Gulf War to the rescue which continues today for questionable reasons. It is these reasons that are important because it is the world Mattis grew up in and strongly influences his beliefs. In short, a belief that middle east security and alliances are essential for the U.S. to protect its global interests.  

Btw, we are the only nation on earth that feels compelled to build a security budget and force structure to accommodate a global security reach. So, what does one do in order to maintain its size, we make s%#t up!! Afghanistan, Syria, Iraq and for that matter Korea were never a strategic threat to the U.S. What I mean by strategic threat, is a threat so large that it challenges the survival of the U.S. Today, we only have one! Russia and its thousands of nuclear warheads pointed our way. This is the only strategic threat to the U.S. and the Pentagon woefully under budgets for its defense (I can tell you horror stories about the mismanagement of missile and airspace defense of the U.S.). As a matter of fact, we do not have a maritime or land defense plan for the U.S.!! Doesn't exist!! But we have several defense plans to defend our interests overseas! Hello? I fought these dysfunctional battles inside the Pentagon trying to get people to understand that defending our U.S. borders was our number one job! It was not our job to create threats that were really someone else's problem.

ISIS, Al Queda, Syria, Korea, Afghanistan, or North Africa are NOT strategic threats to the U.S. and as we have painfully realized, not worth the blood and treasure we have spent trying to make them in our image. IT WON'T HAPPEN...because they don't want it! What Mattis may not realize is that this president actually understands this and promised the American people he would get us out of policing the world. He has stated this view repeatedly over the last 30 years...there should be no surprises!  

Trump is fighting a generation of generals, politicians, and analysts as well as a military complex who have seen only the world of large military budgets and foreign wars. Yes, we want a force capable of projecting anywhere in the world since we do not want to fight any war on our own property. But, the threats need to be strategic in nature, we need to force size to it, and then build an environment (partnerships or alliances) that can project it (bases, agreements, etc.)..and finally, train to it. Unfortunately, we have been caught up in unwarranted conflicts in areas where progress stopped 500 years ago, tribal customs dominate and democracy is misaligned with theological based customs and traditions. In other words, we won't change them because they can't even spell it!! Mattis is part of an old entrenched military complex that truly believes that terrorists and civil wars in godforsaken areas are a part of our strategic security direction.

Well, guess what? There's a new sheriff in town who believes in America first, protect our borders, let others fight their own battles, and let those who want to work with us, pay for it!

 Long term holders of gold have a different perspective of the world. They are not believers in instant gratification. Nor do they believe that a world based on money printing and debt can create sustainable wealth. They also know that the socialism which has spread like a plague in the Western world only works until you run out of other people’s money.

What makes gold the most obvious wealth preservation investment and insurance against a false financial system is its permanence. The proof of this is indisputable since gold is the only money that has survived for 5,000 years. Ephemeral financial systems and currencies come and go, so do empires. But gold survives them all. As JP Morgan stated: “Money is gold and nothing else”.

WHY BET AGAINST A 5,000 YEAR SUCCESS Anybody who doesn’t understand gold, neither studies nor understands history. There is nothing magic about gold, it is just real money. But since it is the only surviving currency why bet against a 5,000 year record? Gold is not an investment, it is a store of value and at times a medium of exchange.

It is quite astonishing that the immense wealth which has been accumulated by the top 1% in the last few decades is based on Alchemy and fake money. This has been a fake Golden Calf that in this era has been worshipped since the early 1980s. Since that time real money, or gold, lost its lustre totally as financial assets were leveraged to the hilt. But things started to change in the early 2000s.

GOLD HAS OUTPERFORMED ALL ASSET CLASSES THIS CENTURY During periods of financial wizardry which we have experienced since the Fed was created in 1913, gold might seem like a barbarous relic and much less interesting than leveraging assets with the help of credit. What few investors realise is that in real terms, investment markets topped in 1999. As real terms can never be measured in fiat money, only real and permanent money can be used as a measuring stick. And that is of course gold.

If we look at the Dow/Gold ratio (the Dow index divided by the gold price), it topped in 1999 at 44. It reached an interim bottom at 6 in 2011 as gold peaked at $1,920. That was a massive 86% decline in the ratio and a virtual wipe out of stock investors, measured in real terms.

As the chart shows below, stocks then recovered but only by 50% of the decline against gold. Thus in spite of a massive stock market rally between 2009 and 2018, the Dow index has still lost over 50% against gold since 2000.(Dividends are not taken into account, nor is any gold lending).

STOCKS TO FALL RAPIDLY AGAINST GOLD Technically it now looks like the downtrend of stocks against gold has resumed. Since the peak in October, stocks have lost 20% against gold. But this is just the beginning. Eventually the ratio will most likely decline to below 1 where it was in 1980 and probably below the long term support at 1/2. That would be a massive 97% decline of the stock market from here, in real terms, which is gold. So that is the magnitude of the potential asset destruction that the US and the world will experience in the next 2-6 years. But like any prediction, we will only know afterwards.

GOLD AT ALL TIME HIGHS IN MANY CURRENCIES Gold in US dollars is up 10% or $120 since the bottom in August 2018. Still, clearly a long way from the 2011 top at $1920. But the temporarily strong dollar doesn’t reveal the true picture of gold. For that we need to look at gold in other currencies. We know of course that gold in Argentine pesos or Venezuelan bolivars has made exponential moves. Less known is perhaps that gold is at or near the highs in many currencies like Norwegian and Swedish kroner or Canadian dollars. And in Australian dollars gold made a new quarterly closing high in December 2018 which is very significant. Major moves normally start in the periphery so what is happening with the gold price in various currencies will eventually spread to all currencies. It would not be surprising to see new highs in gold in all currencies in 2019, including against the US dollar. But remember it won’t be a straight move and there will be a lot of volatility.

GOLD – SILVER RATIO CONFIRMS STRONG UPMOVE COMING IN METALS The other major predictor for the precious metals is the Gold/Silver ratio which I often have mentioned. Real sustained moves up in gold and silver only happen when the Gold/Silver ratio falls which means that silver moves up faster than gold. The ratio made a new high at 87 at Christmas and has moved down 6% in 7 trading days. We still need to see validation of this move but long term momentum indicators confirm that a major move down has started.

RISK GREATER THAN ANY TIME IN HISTORY What we do know is that risk in asset markets and in the financial system is now greater than any time in history due to the size of global debt of $250 trillion, plus unfunded liabilities and derivatives of another $1.75 quadrillion giving a total risk of over $2 quadrillion. Once this risk starts to manifest itself in defaults, the money printing undertaken by central banks will dwarf any QE programme of the past. The big difference between today and 2007-9 is that next time the fake money created will have no effect. The magnitude of the problem and the money creation will have the same consequences as in any hyperinflationary economy. It will totally debase the dollar and other currencies until they are all worthless.

What is clear is that times are changing. Bob Dylan, the Nobel laureate described the course of events that we will see next already 55 years ago in his 1964 song:

THE TIMES THEY ARE A-CHANGIN’
Bob Dylan 1964
Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone.
If your time to you
Is worth savin’
Then you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’.

The song is quite long so after the first verse I am just including the last five lines of the song which aptly describe the wealth destruction and wealth transfer that the world is about to experience:

The order is
Rapidly fadin’.
And the first one now
Will later be last
For the times they are a-changin’.

THE GREATEST DEPRESSION EVER? So now is the time to “start swimmin” as the greatest wealth destruction in history is beginning. But most of the investment world hasn’t even begun to understand how serious it will become. Because the coming implosion of stocks, bonds, property and virtually all other asset markets is just one aspect of the coming super bear in the world economy. Still, it will be enough to create the greatest depression ever as stocks decline by 75-95% and debtors default.

The coming collapse of financial markets will have a major impact on all aspects of society. Firstly there will be mass unemployment. Most countries massage the employment figures. US real unemployment is around 22%. The 3.9% unemployment reported last week is pure fiction. There are 96 million Americans capable of working who are not in the workforce. But they are conveniently excluded from the fake statistics. The real figure in the coming depression is likely to be well above the 25% that the US experienced during the 1930s. The same will happen in all industrialised countries.

ONE PAY CHECK FROM MISERY Most people in the West live from pay check to pay check. With credit card, mortgage, student and car debt to finance, they would quickly default once their pay check stops coming in. In 1980 the average American had a debt which was 2x his monthly wage. Today it is 5x. Over 50% of US children live in a home that receives help from the Federal government.

Until now socialism has taken care of virtually everyone who couldn’t make ends meet. In Europe we have had socialism in most countries for decades. Gradually the US has now also become a socialist country. And socialism has appeared to be the perfect political system for creating eternal wealth and buying votes. The only problem is that socialism only works until you run out of other people’s money.

As government debt and interest rates rise together, more and more money needs to be printed to finance defaults, failing banks, derivatives exploding, rapidly rising government expenditure including social security payments, imploding pension funds, collapsing tax revenues etc.
The list of holes to plug will be endless.

GLOBAL RESET WOULD FAIL As hyperinflation takes hold and money printing makes most currencies worthless, governments will attempt to create crypto based electronic money but this will just be another form of fake money and won’t succeed. I don’t think there will be a global orderly reset because major powers will not agree. China and Russia will do their own thing and so will the US. The EU will probably be in a total mess at that time as will the Euro. Banks in Italy, Greece, Spain, France, UK and Germany etc will all fail.

DON’T TRUST THE FINANCIAL SYSTEM Any money in the bank anywhere in the world will either be lost through insolvency, bail-ins, or total debasement of the currency. Many of the other assets held in a bank could face a similar fate.

Cassandras are never liked, neither before the event they predict nor after it has happened. I have often stated that I hope that my forecasts are wrong because if they come true it will be devastating for the world. Most people will only be wise after the event. What is clear is that the risks are massive and wealth protection means taking steps before the event and that time is now.
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The most important asset human beings have been gifted with is their brain and their genes, including their health. Anything material we can lose, however well we protect it. But survival depends mostly on how you use your brain, as long as you are healthy of course. Even the best plans can go wrong. Remember “The times they are a-changing” and unforeseen events will happen out of the blue. Thus we must be prepared for the unexpected and react as necessary. It will not be a static and easily predictable course of events. There will be panic moments and there will be seemingly quiet times. But the trend will be very clear which means strongly down of the world economy and financial markets. It might take ten years or longer. Nobody knows. What is important is to surround yourself with a supportive group of friends, family as well as other people who will be useful like trusted financial experts, doctors, farmers, tradesmen etc. And remember that: THIS TOO SHALL PASS

Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 44 213 62 45

Matterhorn Asset Management’s global client base strategically stores an important part of their wealth in Switzerland in physical gold and silver outside the banking system. Matterhorn Asset Management is pleased to deliver a unique and exceptional service to our highly esteemed wealth preservation clientele in over 60 countries.
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Articles may be republished if full credits are given with a link to GoldSwitzerland.com.

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Alexander Trigaux, Editor, GoldSilver  
DEC 3, 2018


It stands to reason that if we have indeed been experiencing an Everything Bubble, we will experience an Everything Collapse.
According to Deutsche Bank and Bloomberg, more asset classes have fallen in unison this year than they have in 117 years of previously recorded data.

​To read the rest of this article, click here.